Construction Tax Blind Spots, WIP Discipline & Smart Entity Choices — with Dan Kraft, CPA (Dean Dorton)

Rishi Srivastava (00:41)
Today, our guest is Dan Kraft. Dan, welcome.

Dan Kraft (00:45)
Thanks for having me.

Rishi Srivastava (00:46)
Section one here is on your background and industry journey. Tell me a little bit about yourself. How did you find your way into construction, real estate, and manufacturing?

Dan Kraft (00:56)
So it’s really kind of a natural evolution through our profession where when you first come in as a staff, you kind of get assigned to a whole bunch of different types of work. And when I first came into the profession, I used to work on some smaller contractors, mostly subcontractors, some small manufacturing clients. And just as I continued throughout my career, I started running those jobs.

and started interacting more with the clients and really just kind of fell in love with construction in general just for its complexities and just overall interest in it. So I kind of stuck with it and here we are today.

Rishi Srivastava (01:36)
Yeah, you hold a pretty big portfolio of construction clients right now, right?

Dan Kraft (01:42)
Yeah, I mean, we, yeah.

Rishi Srivastava (01:44)
You’re known as a genuine people person in a technical tax world. How has that shaped the way you work with contractors?

Dan Kraft (01:52)
It’s very good question. What I find is in the accounting profession, things can be relatively technical, especially on the tax side of things, they can get technical real quick. And when we’re dealing with clients in general, specifically construction clients, they don’t want all that technical jargon. They want somebody that can kind of break it down into layman’s terms. And that’s just something that I think I’ve always been able to do.

because in my brain I need to break it down in order to understand it. So it just makes it easier for me to talk to people on their level and explain what all is going on and what the tax code is or whatever the situation is so that they can digest it and react accordingly. So think people really appreciate that for me that I don’t talk to them like I’m some code head or something like that or that I talk to them solo.

they think I’m not very intelligent. So that’s where I think my genuineness comes from and where people really appreciate that.

Rishi Srivastava (02:53)
Yeah,

I mean, being able to understand other person’s perspective is so important. And if you try to make it too complex to, let’s say, contractor who doesn’t know any of your tax laws, I mean, they probably are not to like it.

Dan Kraft (03:07)
Yeah, I mean, they’re very good at building whatever they’re building or running electric lines or deciphering plans or blueprints or something like that, which admittedly I probably could not do without a lot of training. And I try to look at it from that perspective of how do I explain this to you so that you understand in words that you understand, not necessarily just me spitting out any and everything that I know to prove that I’m…

Rishi Srivastava (03:22)
⁓

Dan Kraft (03:35)
the smartest person in the room because I’m probably not, admittedly, and I think that works to my advantage.

Rishi Srivastava (03:43)
Yeah, but you’re the best in tax, you know, the guy in front of you is sitting, you know, a contractor. He is good at his stuff, you know.

Dan Kraft (03:46)
You

Right,

know, knowing when to stay in your lane and really do what you’re

Rishi Srivastava (03:53)
Bye.

What drew you to specialize in flow through entities and the complex world of S-corps, LLCs and partnerships?

Dan Kraft (04:03)
So like I mentioned before, just the natural progression of a career in accounting, you start to work with certain types of clients and those clients really kind of dictate from an entity standpoint which ones you really want to dive into and really start to understand. And really in this era that we’re dealing with partnerships and S-Corps and then LLCs that we can throw in there as well.

is really the dominant entity choice. You don’t see a lot of C-Corps. You do some, but not a lot as you do with the flow through. with just the volume of work that I’ve done over the years and just the different types of clients that we have, you really have to start digging into how all those entities work and some of the tips and the tricks and the little nuances to sit yourself apart from your competition, but then also be able

give good, valuable advice to those clients.

Rishi Srivastava (05:00)
Yeah, you said C-corps are not very popular. Any reasons?

Dan Kraft (05:04)
I’d say the main reason is the double taxation that you have with C-Corps. So the company itself is paying tax and then when you take a dividend out of the C-Corporation, you’re getting taxed again. With the overall kind of lower rates that you may see on the flow through side, that makes it a little more attractive. It makes it little more attractive when you start to get ⁓ families or other owners in there as well.

Rishi Srivastava (05:08)
Hmm.

Dan Kraft (05:30)
So overall, I think it’s just an easier type of entity to digest from the owner standpoint. But we’re starting to see a little resurgence in C-Corps because the corporate rate is a flat 21%. And there’s some other provisions out there for qualified small business stock that could eliminate that double taxation. But again, that’s case by case basis. I wouldn’t advise clients to just jump into one or the other.

really need to do an analysis and figure out what’s best for the company and the long-term goals.

Rishi Srivastava (06:02)
Section two here is on construction, tax strategy, and planning. Can you walk us through the biggest tax blind spots you consistently see in construction companies?

Dan Kraft (06:13)
I don’t know if it’s necessarily tax specific, but really just cash flow management. You know, we’ve seen contractors really go out of business because they didn’t manage cash flow right. Especially when you drop down to cash flow on the jobs where depending on your customer or your client, the owner that you’re working for, you may have to invest cash upfront, buying materials, buying equipment, whatever it is.

you may not be allowed to bill for that right away. So how do you balance that with the eventual billings that you are gonna take and do you have enough equity and capital to sort of get you through some of those low spots? And I think with contractors, when they first start out, they’re really, really good at it because they’re crossing every T and dotting every I, they’re counting every penny. Then as they start to grow, I think that kind of, you know.

gets a little lax and then they get to a point where maybe they’re in trouble, that a job’s gone bad or they find out that somebody’s been stealing from them and some of those good practices that they started out with start to come back into the fold. So if there’s one thing that I would tell anybody, watch your cash flow, manage your cash flow, that will take you a long,

Rishi Srivastava (07:30)
nothing on the tax side.

Dan Kraft (07:31)
Well, mean, sort of in conjunction with that, if all of sudden you’re taking that cash and you’re going out and buying a whole bunch of trucks that you don’t need, that might not be the best use of it. So from a pure tax side, I like to tell clients, let’s look at the business reason first. And if it makes sense, then let’s go ahead and do it. Then we’ve got the tax benefit on the back end. But a lot of times I’ll hear,

Rishi Srivastava (07:39)
Mm-hmm.

Mm-hmm.

Dan Kraft (07:55)
people in a cocktail party or something say, well, my accountant just said to go out and buy this so that we could get the tax deduction. I have to kind of bite my tongue a little bit because that might not be the best way to approach it. And again, it’s still cash out the door that you may need to use for other things.

Rishi Srivastava (08:10)
Yeah, Subcontractors, have so much kind of disparity in cash in versus cash out, right? You got to have that capital to withstand this disconnect, know, that 60, 90 days that you’re waiting for your client to pay you.

Dan Kraft (08:25)
Yeah,

and a lot of contracts these days have ⁓ a pay when paid clause. So if the general contractor’s not getting paid by the owner, then the general contractor doesn’t have to pay the subs. And if there was some issue at the top of the food chain, then it could be a while. It could be 60, 90, 120 days before you get paid, and you still have to keep paying your guys, you still have to keep paying your vendors, so.

Rishi Srivastava (08:30)
Hmm.

Dan Kraft (08:52)
It’s something that you really need to just kind of keep your eye on the ball at all times and manage that appropriately.

Rishi Srivastava (08:58)
Definitely. How should construction owners think about choosing the right entity structure?

Dan Kraft (09:04)
So I think you need to start at the end and work your way back. So every company has a life cycle. Every company has a purpose for the owner on why they’re there. So for example, some companies may be a lifestyle company for the owner where they’re going to make money, they’re going to pull money out and use that to pay for their kids’ college, they’re going to accumulate wealth.

buy things, do whatever, so that at the end of the working cycle, there might just not be anything left. No value in the company, close it down and move on. Others may want to create a legacy where they form a company, they want to pass it on to their kids or other relatives, management, whatever, and get that company to, we’ve been around for 100 years, so there’s very different paths.

entity choice depending on how you want that to go. So the latter might be more of a C Corp option because then can have owners come in and out as you want it to. If it’s just a lifestyle where you may shut it down at the end, an S Corp may be the best way because then you can take distributions out as you have the cash and the basis to do that. you know, it’s really, I think, looking at

Rishi Srivastava (10:00)
Mm-hmm.

Dan Kraft (10:17)
the long term picture, not just the short term in terms of tax rates or maybe some other perks that one entity has over another.

Rishi Srivastava (10:26)
I really like the

idea of thinking about the very end game,

Dan Kraft (10:30)
think we need to do more of that.

Rishi Srivastava (10:32)
Yeah, yeah.

What are the most common mistakes contractors make when evaluating entity restructuring alternatives?

Dan Kraft (10:41)
Well, I think probably the biggest one, is just being too narrowly focused that they may want to change entities for tax rate reasons. And we saw this come up in a lot of our consulting and advisory around 2017 when the tax law changed to allow C-Corps to be taxed at 21%.

I had lots of calls and lots of inquiries from clients to say, maybe we should switch to C-Corp, the tax rate’s cheaper. Well, you’re right. If we look at the short term, we may be able to save a little bit of money on the tax rate, but…

Rishi Srivastava (11:10)
Mmm.

Dan Kraft (11:17)
let’s look at the other factors that come into it like the double taxation and some of the rules that owners have to play by under a C-corp versus an S-corp or partnership structure. And I think it really quickly said, let’s not do anything. Plus just the sheer cost of having to do all that. You got to pay attorneys, you got to get your.

bank involved from the standpoint that they’re okay with it or the surety. There’s other players that are involved than just the accountants and the owners. So, one, it’s just kind of getting all the facts together and really kind of laying things side by side to see if it makes sense. But I think a lot of times people just jump to, hey, this is what my friend’s doing, this is what my competitor’s doing, so I need to do the same thing. It’s not always the right answer.

Rishi Srivastava (12:00)
I’m like…

cost of change versus the potential benefit.

Construction has thin margins and volatile cash flow. What tax strategies help smooth that out?

Dan Kraft (12:11)
Any kind of forecasting that you can do. A lot of time, well, I would say every contractor should know what their backlog is. So how do you forecast that out to say when do we have jobs coming up? So that’s cash coming in. When do we have to buy materials? And, you know, obviously the labor schedule that goes in with that. So the better you can get at that, I think the better you can manage some of these ups and downs.

One thing that we’ve seen with struggling contractors is doing a 13-week cash flow projection. So what do we need to spend our money on over the next 13 weeks and really budget for that and stick to it to try to not spend money outside of what’s absolutely necessary? That can help smooth out those peaks and valleys, especially when we’re not really sure that we’re going to get paid in time from

Either the general contractor or the owner And then as much as we can bill ahead of time I think that’s starting to become more commonplace where Owners are allowing the the contractors to bill up front because they want to lock in prices on materials You know so on and so forth so if we can get ahead and be over billed Then that’s always a good thing to be to be over billed

Rishi Srivastava (13:28)
Another speaker was telling me he loves overbilling versus underbilling.

Dan Kraft (13:32)
Yeah, the banks love it too, assuming that the banker understands what over and under billings are. Certainly the insurance guys like it too. it’s always a good position to be in to be over billed. You have a lot more flexibility and…

Rishi Srivastava (13:34)
Yeah.

Dan Kraft (13:49)
opportunity to not have something go wrong.

Rishi Srivastava (13:52)
Yeah. The next section here is on owners, partners, and personal tax impact. You have deep expertise on the individual tax impact for partners and members. What should owners be paying closer attention to?

Dan Kraft (13:58)
Yeah.

So this really comes down to the work in process.

So many contractors over the years we’ve seen die by a bad WIP schedule. And if I’m the owner of a construction company, I want to make sure I know where jobs are at at all times. If they’re ahead, if they’re behind, if we’re on target for gross profit, did we estimate it right? All those things would keep me up at night. So having that good information, timely information to know if a job’s going bad.

Rishi Srivastava (14:25)
Mm-hmm.

Dan Kraft (14:40)
What can we do to either stop the bleeding or maybe possibly reverse it? Unfortunately, what tends to happen is you get to the end of the job and you you try to go back and do a change order or something and the GC or the the owners like, no, we’re not approving that. You’re stuck with it. And had that been known ahead of time, then it could have really helped.

you know, ward off any bad things that could happen. So if you’re not looking at that, or at least not being provided that information, you may have a great accounting team and a great support team underneath you, but if they know that you’re at least getting that, it should keep them honest in the fact that you’re looking at it, even if you really aren’t. So sometimes perception is a good control over what’s actually happening. So if they think you’re looking at it,

They’re gonna make sure that it’s as accurate as possible and hopefully help you keep everybody around.

Rishi Srivastava (15:36)
was talking to another speaker and she was telling me that there three financial reports that are important in construction finance P &L, the balance sheet and the WIP and she called the WIP one ring to control them all

Dan Kraft (15:51)
You know that’s that can’t be closer to the truth because if you don’t know what’s going on at that level things can really get out of control. Cash flow gets out of control assets get misused or stolen.

I can think back 20 years when I first started where a contractor we were working with, guys were ⁓ pulling an extra foot or two of wire off the reel and then taking that extra foot or two and throw it in the back of their truck to go scrap after the day was over. I mean, they found hundreds of thousands of dollars in savings by just tweaking that a little bit.

And that’s something that is real easy to do, that you set that tone and you put some controls in place. And now those guys probably make 10 times the amount of money they would have kind of stealing some of this extra scrap off the job. So pay attention to that stuff, I think is really important.

Rishi Srivastava (16:48)
You know, your WIP inside out just so important.

Dan Kraft (16:51)
It is in really in any industry. You could be a manufacturer, know, job costing a product. It could be, you know, a service based firm where you’re tracking, you know, billable time or something like that. But if you know, if you know what’s in there, you can see problems earlier and react quicker.

Rishi Srivastava (17:07)
How should owners think about basis, distributions, compensation and their K1s when planning for the year?

Dan Kraft (17:15)
So we’ll start with compensation because that’s always a hot topic with any kind of company. You the IRS has just a multitude of cases out there where they’ve challenged reasonable compensation within any kind of entity. And I think that’s something that you need to benchmark and just be aware of. There could be reasons why you might be undercompensated. There might be reasons why you’re overcompensated. And that’s OK.

I think the general rule that we’ll look at is, at least compensate yourself up to the FICA limit. That way the government’s getting their full payroll taxes. It’s kind of hard to argue that you’re being…

at that level. So that’s something that the IRS always has on their hit list that you’re going to watch want to watch out for. But with basis and distribution I think you just need to be aware of what the basis in the company is and take distributions accordingly to not damage cash flow and you know make the company so cash poor that you then have to put money back in.

So if you do something like that 13 week cash flow or if you do some budgeted projections

on your cash needs, then I think it’s okay to take out more distributions that you need, assuming that there is basis there to take the distributions out tax free, and then invest them in whatever you want. You make that money work for you. Diversify, because most business owners that we work with, their biggest investment is their business. So if you can take some of that equity out.

and diversify it into other things, I don’t think that’s a bad thing.

Rishi Srivastava (18:51)
So let’s say I am a construction company owner and I take $100,000 in distribution, right? And then for whatever reason, I didn’t project my cash side and I need to put back that $100,000 into the company. Is there going to be some tax consequence of this kind of event?

Dan Kraft (19:10)
No, because assuming we’re talking about a flow through entity, there wouldn’t be because the way that it’s all going to work is you’re going to pay tax on the net income regardless if you take a penny out of the company or not. So if you have basis, that’s sort of the accumulation of all your…

Rishi Srivastava (19:22)
Mm-hmm.

Dan Kraft (19:27)
net earnings over the years. So that basis will allow you to take the distribution out tax free. And if for some reason you need to put the money back in, then you can put the money back in tax free as well. So to an extent, if you want to look at it in a very basic term, it can be kind of used like a piggy bank or in that light. You don’t want to do that because there’s, you know, it looks odd. The optics are bad if all of a sudden money’s just coming in.

out of the company, but if you need to put money back in that’s okay. And then be very clear on what is that money being contributed back to the company versus being loaned back to the company. So it’s something that you want to be very distinct on and if it’s a loan charge interest, if it’s a contribution, then it’s back in the company’s hands.

Rishi Srivastava (20:06)
Boom.

sense. When taxable income and book income diverge, how do you help owners balance tax minimization with bank and bonding requirements?

Dan Kraft (20:26)
The number one thing, and I think if you talk to bankers from their perspective or the bond agents or the sureties from their perspective, it all comes down to relationships. You have good relationships with all the partners that you’re partners with, then those conversations become easier. They may still be difficult conversations.

Rishi Srivastava (20:38)
Mmm.

Dan Kraft (20:49)
to go to a banker and say, lost a lot of money this year and we know we’re stretched out on our line, but we need a little bit more time or we need a little bit more money. That’s a tough conversation to have. But if you have a good relationship and you’re transparent with your banking relationship, that goes much further than guess what happened? And then, they panic.

People at the bank start to panic and then that’s when things can start to unravel. But all the bankers that I have relationships with, they always say, if things are going bad, tell us early, keep us up to date, and we will work with you as best that we can. And they really do want to work with you. And same with the insurance side. If you got a job that is going bad, let the surety know as soon as you can.

give them a heads up so that they can help you work through it. And they may be able to help you to the point to actually getting out of whatever problem that you’re in. it may be a little embarrassing. It may be a little mark on

yourself, but more transparency is better. Coming with those explanations and the need for help is much better in the long run.

Rishi Srivastava (21:59)
Yeah, when I think about construction companies, any construction company failing is not good for the accounting company or surety or bank, right? It’s everyone’s best interest that the company, succeeds in all the parties involved.

Dan Kraft (22:11)
Yeah.

Yeah, and I know a lot of times, we’ll hear the stories of, well, we were just waiting on this one check to come in and it didn’t come in or we were just waiting for this one thing to happen and it didn’t happen. And that’s why things got to where they are today. And stuff like that happens. think anybody would be naive to think that every company out there is immune to things.

So, it’s like in any relationship, there’s gonna be good times, there’ll be great times, and then there’s gonna be some bad times, there’s some dark times, and you can really tell who’s gonna be there for you when things are dark. And I think if you are, more honest and open and transparent you are, those darker times don’t seem as dark.

You’ve got friends, you’ve got allies that are trying to push you through to your point versus just cutting ties and saying you’re on your own.

Rishi Srivastava (23:04)
Yeah, yeah. The next section here is on growth, structure, and multi-entity operations. For contractors growing quickly, what tax or structural red flags tend to appear during scaling?

Dan Kraft (23:18)
So from a structural standpoint, and this is a plug for all the accountants out there, a lot of times we see that the accounting infrastructure doesn’t keep up with the growth of the company. what your back office needs are at a million dollars of revenue is very different from 10 million, 50 million, 100 million. And as much as owners don’t wanna put…

Rishi Srivastava (23:29)
No.

Dan Kraft (23:44)
money into accounting, the joke is that we’re just overhead. It’s an important part of the process. It’s an important part of the scorekeeping of the company and how good, bad, healthy, poor things are going. So doesn’t mean you got to hire 50 people and spend all that much more money, but…

making sure that it scales, making sure that you’ve got the expertise in house to handle the complexities of the operations that you’re running. Because generally as you get bigger, contracts get more complicated, they get bigger, there’s more risk, and the less risk, or the more risk you can mitigate, the better everybody is. So.

I think looking just outside of accounting, but looking at all the other services, if it’s HR, if it’s your advisory team around you, I think from a tax standpoint, we’ve gotten a lot of opportunities recently, just from the sheer fact that they’ve outgrown their current provider, because it was that maybe small person.

local to their office well they only know so much and now things are more complicated. You’re in multi-state you’ve got different levels of contracts there’s different ways that we account for contracts on the tax side so it just gets inherently more complicated and making sure that you’ve got the right resources in play to help you grow is very important.

Rishi Srivastava (24:51)
and

Yeah, you said it so well. It’s so easy to see the need for more field workers, right? I mean, when I was at one million, I maybe need 10 field workers. But now I got 10 million, I need 100 field workers. It’s very easy to see, but it’s not easy to see. Now I also need maybe double the number of accountants or thrice. I don’t know what that number is, but you know.

Dan Kraft (25:32)
Yeah, that’s exactly right. It’s real easy to see the field side of it, but sort of take that and apply it back to the office as well. know, like I was saying before, the personnel as well too. mean, a lot of contractors that we work with, it’s a lot of family members. know, the husband may be running the field and the wife may be running the office. What’s everybody’s skill set?

Rishi Srivastava (25:37)
Mm-hmm.

Yeah.

Dan Kraft (25:54)
everybody good at what they’re doing to drive the success of the company and just because they’ve been around for a long time doesn’t necessarily mean they have the expertise to do what they need to do so you know more people you’ve got more problems you might need to get an HR certified person on your team not just have your brother-in-law in charge of HR.

Rishi Srivastava (26:15)
Yeah, many contractors and multiple entities, real estate, equipment, operating companies. How should they think about intercompany structure and strategy?

Dan Kraft (26:26)
Yeah, so a lot of the times the structure is very common amongst them. So it may be a group of partnerships or it may be S-Corps or something of that nature so that you can have those inter-company transactions and it’s a little bit easier to manage. But really it comes down to…

in my opinion, more of the liability that you have out there. And certainly not being a lawyer, this is just my opinion, but if you have a fleet of trucks that are out servicing all kinds of different locations, more of a, maintenance type fleet, what happens if one of those trucks crashes into a car and kills somebody? ⁓

If you have that in a separate entity, at least I think, you would be able to isolate the other assets from potential harm. So that’s why we see that happen, because if everything’s just in one company and there’s a lot of assets in that company, then I could see a decent lawyer probably going in and being able to get a large settlement because there’s a lot of assets there. Whereas separate entities, would be

Rishi Srivastava (27:15)
Ooh.

Dan Kraft (27:36)
thing that you sort of limit yourself in a way to do that.

Rishi Srivastava (27:41)
Yeah, makes sense. What trends do you see emerging in construction, taxation or compliance that CFOs should prepare for in the next few years?

Dan Kraft (27:52)
So we’ve been riding a pretty big wave the last 15 years, maybe 15 plus years. Things have been going real well. I think when we saw COVID and how that really didn’t have an impact on the construction industry, that man, we can really weather any kind of storm. And I think at some point, just history is gonna tell us that that record is gonna stop playing. ⁓

Rishi Srivastava (28:14)
Mm-hmm.

Dan Kraft (28:15)
supposed to stop playing I think like four or five years ago and every year any economist you talk to you, ⁓ this is the year for the recession, this is the year for the recession and it keeps getting pushed down the road. So I think if I’m a CFO of a company that’s something that I want to keep an eye on is general economic conditions, what’s happening.

We thought something was going to happen with the tariffs that started coming into play this past year. And even though it has had some impact, it’s not maybe to the level that everybody thought. So if we’re looking at those things and we’re looking at the general conditions, how are we preparing for a downturn? How are we preparing for a potential recession? And I think if we were in business back in 08 or 09,

Rishi Srivastava (28:53)
Mm-hmm.

Dan Kraft (28:59)
That’s something we can go back and say, we learned some lessons the last time it downturned. What can we start to prepare ourselves for when this next one comes? Because it will come at some point. We don’t know when. If we did, I think you and I would be rich men. But it’s going to come. So what are some things that we could do?

Rishi Srivastava (29:15)
Mm-hmm.

Dan Kraft (29:19)
Let’s look at our internal functions. Do we have some fat that we can trim? Let’s look at our expenses. Are there some things that we’ve just kind of let get out of control, especially on the discretionary side, that we could just tighten up and be a little more mindful of what we’re spending our money on? Are we talking to our vendors to make sure that we’re getting all the right?

discounts, the best pricing, all of those type of things. Recession or not, those are just good things to do in general and to look at every couple of years. as we look out, it’s always a good practice. It’s always best practice.

Rishi Srivastava (29:55)
Yeah, actually, predicting the future is the hardest thing in the world,

Dan Kraft (29:59)
Yeah, I I think it also gets back to just the more general, the more proactive we can be, then the less reactive we have to be, which gives us more control. So if we can start to do things that we have control of, then when things happen that are out of our control, it’s a lot less painful.

So I think that’s what a lot of contractors that we work with learned back in 08 and 09 was we weren’t ready, we had no control, now we have to do things that we’ve never done before and it just flat out hurts. What are we going to do different the next time?

Rishi Srivastava (30:39)
Yeah, In 08 and 09, not a lot of contractors were issuing POs even. Everything was so off-hand. Whatever, just go buy and invoice.

Dan Kraft (30:51)
Yeah, and those are the things, those simple controls that we have in place, there’s a reason for them. And that’s something that, even though it seems like a burden to do, there’s a good reason behind it. And not to say that everything’s perfect, all the processes and procedures are perfect, that’s something that you should look at every once in a while, but.

They’re generally there to protect the employees, to protect the owner, to protect the people that are in those positions. So it’s always good practice to follow the rules.

Rishi Srivastava (31:24)
Uh-huh.

last section here is on field, finance, and CFMA insights. You are active in CFMA. What topics are construction finance leaders most concerned about right now?

Dan Kraft (31:37)
So right now, I would say taxation’s a big concern. It’s certainly an expense on the P &L that everybody’s taking a look at, wanting to make sure that they pay their fair share, but also paying the least amount of tax as possible. Employment’s still a big thing that we hear people talking about. If they had more employees, they could do more work, so on and so forth.

It’s probably not as big an issue as maybe it was four or five years ago where everybody was, you know, had huge backlogs and just didn’t have the people to do it. And they’re like, this is really going to hurt. Well, I think the customers have adapted too. So it’s still going to be a big problem. And that kind of ties into succession is probably the third one that we hear a lot about. So when you look at the employees, skilled labor is a big problem.

So when those skilled laborers start to retire, who are you going to replace them with? I don’t think there’s the technologies there to have robots do a lot of these things. It may be there at some point, but not now. And then you look at the general succession of just your C-suite people in the company that they’re going to look to retire. The owners are going to want to retire.

something different so how do we keep the continuity of the company going forward so not only from the field side but also from the management side as well so I don’t think there’s any kind of magic bullet or you know magic pill to say well if you do this then all your problems are solved but I think doing nothing is the worst thing that you could do

If you’re not thinking about it, if you’re not trying to at least formulate a plan with your management team, I think you’re totally missing the mark. Even if it’s something that you might not be able to financially afford or you may not have the time to do, but at least think about it. Put something down. know, revisit it. Do something.

Rishi Srivastava (33:33)
Yeah. What advice do you have for project managers and superintendents about how their decisions in the field impact the company’s tax position

Dan Kraft (33:43)
So for those out in the field, if they have more of an owner’s mindset, I think that can help the organization and the tax impact that it has. One thing that I learned early on in my career was that tax rates are never 100%.

Rishi Srivastava (33:50)
No.

Dan Kraft (34:00)
So the government’s always gonna get their piece. So the more money you make, even though the number gets bigger that you pay to the government, it’s still a percentage. So if you can get those field people, your supervisors, your foremen, thinking like an owner and not necessarily the buddy to all the field guys, then I think you start to accomplish those goals.

to where you’re not letting guys, you know, clock out 15 minutes late. You’re not kind of turning a blind eye to them showing up late on the job site. If they’re throwing scrap in the back of their car, like I was talking about earlier, that’s all money. That’s all coming out of somebody’s pocket. And that stuff, if…

Rishi Srivastava (34:22)
Yeah.

Dan Kraft (34:43)
you’re in that supervisor role, curb that as best you can. These guys, if you give them an inch, they’re gonna take it. And they may seem like they’re your best buddies, and they may very well be.

But if they see a crack, they’re going to take advantage of it. And then everybody’s going start doing it. And then it’s going to be really hard to get back to normal. So if you put that owner’s mindset on, you don’t have to be super hard about it. But keep that in back of your mind. I think it’ll pay dividends and ultimately make you efficient on the tax side as well.

Rishi Srivastava (35:22)
I like it. Your advice tends to be on do the business right. The tax is going to take care of itself, most.

Dan Kraft (35:30)
Yeah, and I mean, there’s always gonna be things that you buy that are gonna help lower your tax bill. There’s always gonna be strategies that you can put in place to minimize it as best that you can. But if you’re not paying tax, there may be a chance that you’re not making any money. So.

some clients that I have actually welcome my phone call in April and say, I’m glad you told me that I owe whatever that is because it means I’m making money. So like, well, tell your friends because that’s not the general sentiment.

Rishi Srivastava (35:59)
Yeah.

Constitution is such a complex business. It’s very hard to tell even if you’re making money or not,

Dan Kraft (36:07)
It really is because, like we were talking about before, when you first start out, I mean, you’re watching cash flow like a hawk. And you know if your bank account’s going up, something good must be happening. But as you’re starting to get into these projects that are taking longer and longer and longer, you could have a lot of cash just tied up in receivables or equipment that hasn’t been installed. And you start to kind of lose sight that…

you’re running some really profitable jobs. You just might not have the cash in the bank yet. And that’s where, back to the point of watching that WIP schedule and knowing, what did we budget? Where are we at? How much further do we have to go before this job closes up is you can really get a good sense and a good feeling of where things are if that information’s accurate.

Rishi Srivastava (36:52)
Yeah. The last question here for you is, what’s one thing every construction CFO should be reviewing before year end to avoid surprises on April 15th?

Dan Kraft (37:04)
So probably again, the WIP schedule, I think we’ve beaten that up enough. So we’ll kind of go down to the other ones. Reviewing just your P &L in general. Making sure that expenses are categorized right so that you’ve got, certain things in the right buckets. Because otherwise, if say you’ve got an account for entertainment and you’ve just dump

stuff in there, well there’s a good chance that that’s going to be shown as non-deductible and then you’re not going to get that benefit where there may be things in there that are deductible that you could use to save on tax in April. The other thing is too is look at your balance sheet. Are there other things on there that we need to make sure we account for like fixed assets? Everything on this fixed asset list that we still have.

Do we need to get rid of some stuff? Do we need to turn over some things? If you look out maybe in that first quarter of the next year, are there things that we know that we’re gonna do?

that from a timing perspective, we could back up into November or December and sort of take advantage of some tax deductions there. So those are all things I think, the CFO along with whoever their provider are should be brainstorming now and getting together and talking through. And at the very least, if there’s nothing that can be done,

at least the information’s available to where the CFO knows this is what’s going to happen in April. So if they don’t know what’s going to happen roughly right now, then…

some opportunity for a change. There should be some at least proactive discussion to know what’s gonna happen in April, good or bad.

Rishi Srivastava (38:43)
Yeah, you have to have a sense at least where things will be in four months at the end of December

Dan Kraft (38:49)
Yeah, a lot of clients I talk to, I’ll say there might not be anything that we can do. You might not have the cash to buy something that you need. You might not have cash to pay bonuses or anything like that. But if you knew today that you were going to owe $100,000 in tax in April, you can plan for that. You can start to save some cash. You can make some estimated payments, whatever the case may be. But at least you know.

And when we get to April and I tell you got to write a check for $100,000, it’s not a surprise. Maybe begrudgingly write it and put it in the mail, but at least you know, and it’s not where you think we should be getting a big refund. And then all of sudden you get the,

Rishi Srivastava (39:24)
Yeah.

Dan Kraft (39:34)
You don’t have time to react. You don’t have time to understand why.

Rishi Srivastava (39:38)
Yeah, makes sense. Dan, thank you so much for your time. I had a great time chatting with you.

Dan Kraft (39:43)
Good, I had a great time chatting with you too.